Sarbanes Oxley Act

The Sarbanes-Oxley Act, named after its sponsors, is often referred to as "SOX" and "Sarbox," but its official name is the Public Company Accounting Reform and Investor Protection Act of 2002. This act has been hailed as the most significant change to securities laws since the 1934 Securities Exchanges Act. The Act contains sweeping reforms for issuers of public traded securities, auditors, corporate board members, and lawyers. It adopts tough new provisions intended to deter and punish corporate and accounting fraud and corruption, threatening severe penalties for wrongdoers, and protecting the interests of workers and shareholders (White House, 2002). Major provisions of the act include:

▪CEOs and CFOs are held responsible for their companies' financial reports

▪Executive officers and directors may not solicit or accept loans from their companies

▪Insider trades are reported more quickly

▪Insider trades are prohibited during pension-fund blackout periods

▪Mandatory disclosure of CEO and CFO compensation and profits

▪Mandatory internal audits and review and certification of those audits by outside auditors

▪Protects whistleblowers

▪Criminal and civil penalties for securities violations

▪Longer jail sentences and larger fines for executives who intentionally misstate financial statements

I am of the opinion the Sarbanes-Oxley Act was a necessary piece of legislation to rebuild public trust in the corporate community in the wake of corporate and accounting scandals. Enron, Tyco, WorldCom, ImClone, and Arthur Andersen scandals rocked investor confidence and damaged the reputation of companies large and small. A strong central focus of the Sarbanes-Oxley Act is to enhance the integrity of the audit process and the reliability of audit reports on issuers' financial statements. Some CEOs and CFOs complain they're burdened with huge implementation costs as armies of nitpicky auditors check every corner of their operations (Henry, Borrus 2005). There is no denying that the costs of implementing Sarbanes-Oxley are high. Nevertheless, there is increasing evidence that reform has been well worth the trouble. Lingering problems in the way companies operate have been discovered due to the intense scrutiny of accounting methods and internal controls. Fixing weak financial controls has eliminated some accounting issues before they become problems. I also feel that the passage of SOX contained some elements of a political agenda since most politicians want to project an image of being prepared to act when corporate behavior becomes excessively inappropriate.

The Sarbanes-Oxley Act has irrevocably changed the landscape for CPA firms. It has changed the profession from a model of self-regulation to an emerging government-regulated profession. The environment has shifted from one in which audit committees passively delivered their blessings to one in which they select and approve auditors. This change, from review and signoff to active oversight and control, can spell opportunity for firms ready to embrace change, to respond with a broader set of solutions and to rigorously address issues such as adequacy of controls, fraud risk and appropriate governance. Some accountants believe Sarbanes-Oxley has called into question the character of the entire accounting profession when, in fact, only a small minority of accountants may have acted unethically. Others feel they are an arm of the Public Company Accounting Oversight Board and the SEC and have lost the service perspective with clients. However, according to Deloitte CEO James H. Quigley, "The Public Company Accounting Oversight Board (PCAOB) is very important; they are a very important catalyst to help us as we work to restore trust. As [the] new standard-setter now, we have become accustomed to and ready to deal with the standards as they are articulated by the PCAOB" (Heffes 2005). I am of the opinion it is a new world for the accounting profession and given time will become the norm, much as other world changes we experience are ultimately accepted

The overall effect of Sarbanes-Oxley on publicly traded firms remains in dispute. Proponents of the Act, such as the chief auditor for the Sarbanes-Oxley created Public Company Accounting Oversight Board (PCAOB), argue that the Sarbanes-Oxley Act facilitates access to the public capital market by encouraging transparency and alleviating investor concerns (Solomon 2004). Some legal commentators tend to agree (Cunningham 2003). Opponents of the Act, on the other hand, argue that SOX unduly raises the cost of being public (Coustan et.al. 2004). Another debated issue concerned whether SOX has been disproportionately disadvantageous for small firms. Advocates for small and midsize firms argue the Act would retard competition and growth. They feel it will result in the entrepreneurial spirit of America being stifled and create a climate of fear. Those on the other side of the issue rally for the benefits of accountability, transparency, and responsibility that result from being SOX compliant.

The "House of GAPP", which is the vast universe of accounting standards, is a hierarchy structured along the lines of the floor plan of a house. As with any other structure, the house of GAAP rests on the foundation of the basic concepts and broad principles that underlie financial reporting. According to Thomas H. Spitters, CPA, U.S. GAAP is generally interpreted as containing rules-based, principles-based, and objectives-based accounting standards and principles. It is now moving toward a more objectives-based system that places a responsibility on management and the auditor to capture the objectives of accounting standards in the reporting process. Objectives-based accounting might require less accounting interpretation and judgment than rules-based or principles-based accounting and might thereby enable better consistency and GAAP compliance in the spirit of accounting standards. One drawback of the objectives-based accounting system is